International Finance Discussion Papers (IFDP)
October 1994
Conditional and Structural Error Correction Models
Abstract:
A "structural" error correction model (in Boswijk's sense) is a representation of a conditional error correction model that satisfies certain restrictions. This paper examines the conditions under which such a structural error correction model exists and when the associated representation is of interest. To clarify the nature of such models, several analytical and empirical examples are considered, which violate those conditions. Structural error correction models are economically appealing, but their limitations imply that some care must be taken when applying them in practice.
Keywords: Boswijk, cointegration, conditional models, dynamic specification, encompassing, error correction, exogeneity, general-to-specific modeling, sequential reduction, structural models, vector autoregression.
PDF: Full Paper
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